Collapse of the Bremen-based Greensill Bank has hurt a number of German local authorities. David Green argues their troubles deserve close attention.
You may not have heard of Greensill Bank before, but its collapse has sent shockwaves through almost 100 local councils with their local taxpayers’ cash deposited there.
Despite the very English name, it is actually a German bank based in Bremen, and many of Germany’s municipalities and regions look likely to lose the best part of half a billion euros between them.
Banking legislation is very similar in the UK and Germany, and local government isn’t too different either, so there are undoubtedly lessons to be learnt on this side of the North Sea.
German treasurers and councillors are trotting out familiar excuses: the introductions from brokers that they trusted, expecting the bank’s regulators and auditors to prevent failure, and relying too much on credit ratings.
Reforms
The fact that Greensill paid 0.5% above the market rate was probably more of a deciding factor for many. Of course, there are now widespread calls for a bailout from central government.
But has no-one noticed the huge programme of banking reforms implemented globally since the 2008 financial crisis?
EU legislation, copied onto the UK statute book after Brexit, means that public bodies sit towards the back of the queue for any pay-out when a bank falls into insolvency. The Deposit Guarantee Scheme Directive excludes local authorities from deposit insurance and compensation schemes. And then the Bank Recovery and Resolution Directive means that insured deposits rank as preferred creditors ahead of other investors.
When politicians say that banks are now safer than ever, they mean safer for voters and taxpayers, not for institutional investors.
Around 85% of Greensill Bank’s deposits are from individuals and small businesses. Germany’s version of the FSCS will pay them out in full and wait for the administrators to sell assets and repay the scheme. Only if there is any surplus left over will there then be any pay-out for local authority depositors.
Unfortunately, that seems unlikely. Much of that cash was lent to the bank’s UK owner Greensill Capital and then onto GFG Alliance which owns Liberty Steel in the UK. Those firms are now either already in administration or finding their solvency in question following the demise of their main lender.
Unless substantially more than 85% of the bank’s balance sheet value can be recovered, German local authorities look unlikely to recover a single euro from their combined €500m deposits.
Lessons
The lessons from this sorry tale should be obvious. Banks that pay far above the market interest rate are unlikely to have a sound business model.
Greensill’s depositors didn’t get to earn that extra 0.5% income for the 200 years needed to cover their likely 100% capital loss. Diversification is always important: the huge regional state of Thuringia, with nearly the population of Wales, will shoulder its €50m potential loss far better than the town council of Monheim, smaller than any UK district, will bear its €38m.
Borrowing in advance of need seems to be a common problem too. With long-term rates so low, Cologne borrowed €100m towards refurbishing the opera house, but parked it in several banks including Greensill until the builder’s invoices arrived. Yields may have risen over the last few months, but the savings in interest paid won’t anywhere near cover the cost of carry and the capital loss they will incur.
And the final lesson is not to rely solely on the brokers, regulators, auditors and credit rating agencies that are all paid by the bank to look out for your interests.
Conduct your own due diligence and credit analysis, or if you don’t have the time or the expertise, pay an advisor or a fund manager to do it for you.
No European money market fund has lost a penny or cent in a bank failure yet, and I very much doubt they will in Greensill either.
David Green is strategic director at Arlingclose Limited, treasury advisors to UK local authorities.
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